Supreme Court Curtails SEC Powers in Landmark Ruling

The U.S. Supreme Court has limited the Securities and Exchange Commission's authority to enforce securities fraud laws internally. In a 6-3 decision, the court upheld a lower court’s ruling favoring hedge fund manager George Jarkesy, claiming the SEC’s in-house proceedings violated the Seventh Amendment right to a jury trial.

The U.S. Supreme Court rejected on Thursday the Securities and Exchange Commission's in-house enforcement of laws protecting investors against securities fraud, dealing a blow to the agency's powers in a ruling that could reverberate through other federal regulators. The decision - a setback for President Joe Biden's administration - upheld a lower court's decision siding with George Jarkesy, a Texas-based hedge fund manager who contested the legality of the SEC's actions against him after the agency determined he had committed securities fraud.

It was a 6-3 decision authored by Chief Justice John Roberts, with the court's conservative justices in the majority and the liberal justices dissenting. The court ruled that agency proceedings seeking penalties for fraud that are handled by SEC itself instead of in federal court violate the U.S. Constitution's Seventh Amendment right to a jury trial. "The SEC's antifraud provisions replicate common law fraud, and it is well established that common law claims must be heard by a jury," Roberts wrote.

The liberal justices expressed doubt that the decision can be limited only to fraud actions pursued by the SEC. Justice Sonia Sotomayor, writing for the three liberals, called the decision "a massive sea change."

The view expressed in the decision, Sotomayor wrote, "means that the constitutionality of hundreds of statutes may now be in peril, and dozens of agencies could be stripped of their power to enforce laws enacted by Congress." The case involved Texas-based hedge fund manager George Jarkesy, who the SEC fined and barred from the industry after determining he had committed securities fraud. He responded with a lawsuit challenging the legality of the SEC's system.

Jarkesy was supported in the case by numerous conservative and business groups, which long have complained about the regulatory reach of the federal "administrative state" in areas such as energy, the environment, climate policy, workplace safety and financial regulation. Biden's administration had appealed a 2022 decision against the SEC by the New Orleans-based 5th U.S. Circuit Court of Appeals.

The SEC in recent years has faced a series of legal attacks even as the Supreme Court's conservatives show skepticism toward expansive federal regulatory power. The court in 2018 faulted the way the SEC selected its in-house judges. In 2023 rulings in cases involving the SEC and Federal Trade Commission, the court made it easier for targets of agency actions to mount challenges in federal court. SEC critics have said the agency has an unfair advantage litigating cases before its home-turf judges rather than before a jury in federal court. The SEC, which enforces various U.S. laws that protect investors, pursued 270 new in-house proceedings in the fiscal year that ended on Sept. 30, compared to 231 in federal court.

However, since the Supreme Court's 2018 ruling, most of the SEC's administrative proceedings are now handled by the commission itself, with very few - as of March, just two - proceeding before an administrative law judge. 'POWER GRAB'

The justices in their written opinions on Thursday also clashed over what the ruling means for the separation of powers delineated in the U.S. Constitution between the federal government's co-equal judicial, executive and legislative branches. Sotomayor criticized the ruling as elevating the judiciary and the Supreme Court over the other branches, calling it a "power grab."

"Judicial aggrandizement is as pernicious to the separation of powers as any aggrandizing action from either of the political branches," Sotomayor wrote. The view outlined by the liberal justices, Roberts wrote, "would permit Congress to concentrate the roles of prosecutor, judge and jury in the hands of the executive branch."

The SEC in 2011 began investigating Jarkesy, who founded two hedge funds with his Houston-based investment advisory firm, Patriot28 LLC. The funds had about 120 investors and roughly $24 million in assets under management. An SEC administrative judge found that Jarkesy and his firm violated the Securities Act of 1933 and other U.S. laws including by misrepresenting the identity of the auditor of the funds and value of the holdings. The SEC then ordered them to pay a $300,000 civil penalty and Patriot28 to disgorge nearly $685,000 in ill-gotten gains.

The 5th Court threw out the SEC's decision. In addition to its conclusion about the right to a jury trial, the 5th Circuit found that Congress gave the SEC too much power to choose whether to bring cases in-house, and that job protections for its administrative judges make them too difficult to remove, infringing on presidential powers under the Constitution. The court has curbed the power of other agencies in recent years including the Environmental Protection Agency. In another ruling on Thursday, the court blocked an EPA regulation aimed at reducing ozone emissions that may worsen air pollution in neighboring states.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)